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Author: mwleach One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 37586  
Subject: Re: TSP (I know this is old hat for some) Date: 6/14/2002 9:30 AM
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CAJAG, it looks like you are off to a GREAT start. (By the way, with TSP participation rates currently at about 18% for all the services, it is definitely not "old hat" - at least not yet!)

Ryan (mccauleyr) has the right idea. Since you are one of the few who is smart enough and disciplined enough to get started on their own, funding your Roth IRA first is probably the best plan. Since the IRA contribution limits are up to $3000 this year, this would mean $500 per month total ($250 each for you and your wife) into investments. That's 15.6% of your stated income per month, which is probably close to your limit (particularly if/when you have kids!). Whether you have the money and the desire to continue funding your taxable account in Vanguard Index 500 (VFINX) is up to you. I would lean towards starting TSP and get the tax break for the contributions if it were me. I realize you "don't want to tie everything into retirement", but remember there are ways to access at least part of your Roth IRA and any TSP funds you have well prior to age 59½ without paying a penalty - it is not all "locked up". At the very least, consider participating in a minimal way in TSP. You might sign up for 1% of base pay, plus 50% of any special pays and bonuses. Then, if and when you are due to receive some of those pays at a latter date (a sudden deployment to a tax-free zone, for example), everything will kick in automatically.

As far as asset allocation goes, I think you are doing just fine for now. There are some periods (like now) when bonds outperform stocks, and these periods may last longer than most current investors realize. At my age (military retiree, 54) I have to worry about that. A lot. You don't. Over all periods of time of 30 years or more (and almost all 20 and 25 year periods) stocks have outperformed bonds. By putting the lions' share of your investments into Vanguard Extended Market Index Fund (VEXMX), you are taking an aggressive but, in my opinion, reasonable position for now. Once you get over 10K in your retirement accounts, you can consider some additional diversification. In particular, you may want some additional exposure to stocks of smaller companies. So-called small value stocks have been the best performing asset class over long (and only over very long) periods of time. If you choose to stay entirely with index funds (not a bad decision in my opinion for anyone on active duty who doesn't want to have to earn a secondary MOS in investing ;-), Vanguard has a good fund in that category, Vanguard Small Cap Value Index (VISVX).

Eventually you might want to work towards getting a position roughly equivalent to the following:

40% - US Large Cap (VFINX, or the TSP "C" Fund)
20% - US Extended Market (VEXMX, or TSP "S" Fund.)
20% - International Stocks (Vanguard Total International Stock Index (VGTSX) or TSP "I" Fund.
20% - Small Cap Value (VIXVX - TSP has no equivalent to this fund).

The above percentages are general ideas only, and not locked in stone; however, an all-equity position is probably appropriate until you reach a point were you feel you will need to start accessing the money within 10 years. Asset allocation is as much art as it is science. When and if you do this, it is important to stick with whatever asset allocation you decide on for a long time - until your personal circumstances change. Don't change your asset allocation based on your or anyone else's "market outlook". The only changes you make are to "rebalance": Once every year or so, you restore your original desired percentages by selling a little of whatever fund(s) have gone up recently, and buy a little more of what is currently low and (probably only temporarily) out of favor. Since this will take place in retirement accounts (IRAs and/or TSP), you don't have to worry about any tax consequences of this rebalancing. All this will help to reduce your risk in increase your relative return over the years. This will also allow you to work with your investments a bit from time to time without doing anything dumb. (Many investors - I include myself in that category - sometimes feel an overwhelming desire to do something with their portfolio once in a while, despite the fact that the best course of action is usually, "don't just do something, stand there". Rebalancing allows this natural desire of most investors, which would almost certainly work to our detriment otherwise, be put it to good use by naturally selling high and buying low.)

If all this sounds like more detail than you want to get into yet, relax. By merely continuing your contributions just as your now, you financial future will probably work out just fine. If every service member was doing what you are doing, we would be able to put the FEs (financial/consumer educators) at the Family Support Centers and the service relief societies (AAFRS and NMCRS) virtually out of business. You are your wife are well on your way to eventual financial independence. Stay the course.

Mike L.
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